Pricing Predictions and Trends for 2020: Industrial Distribution
Industrial Distribution is the movement of goods through a supply chain (purchasing, processing, and selling) – from materials producers to end-product manufacturers.
As with most industries in recent years, it is undergoing unprecedented levels of change, with digital transformation disrupting the status quo at every link.
1. Increased Costs Will Push Prices Up
It is an extremely uncertain time for industrial companies.
Global economic growth has slowed, and the geopolitical and macroeconomic climates are volatile to say the least. In fact, as of November 2019, only 30% of the G-20 countries (which represent around 74% of the global gross domestic product), have a Purchasing Manager’s Index (PMI) of 50 or above – the yardstick for expansion.
According to The World Bank, 2019 saw the weakest economic expansion since the global financial crisis in 2008, and it predicts that 2020 will remain vulnerable to uncertainties. Despite the recent trade ceasefire between the U.S. and China, the bank decreased its global growth forecasts due to a slower-than-anticipated recovery in trade and investment.
Many of the newly imposed tariffs remain in place for $360 billion worth of imports from China, pushing up prices through the supply chain and on to the customer. And as of April 2019, the U.S. government collected $22 billion in tariffs for the year, an increase of 78% over previous years.
Though some companies have negotiated lower costs with their foreign suppliers to absorb some of the increase, in many cases, profitability takes a hit. It’s no wonder 44% of middle market executives see tariffs as the biggest risk to their business and some companies are holding off new investments. Increased costs associated with import and raw materials may see some companies reassessing their global strategies, such as finding suppliers in lower tariff countries, like Mexico.
There will be some stability in oil and natural gas prices, however, keeping logistics, transportation and warehousing costs relatively stable. However, the new Marpol Annex VI fuel regulation that addresses air pollution from ocean-going ships will mean additional costs, further eating into profitability.
2.The Rise of D2C: Cutting Out the Middle Man
End customers and buyers along the supply chain are all becoming more sophisticated, demanding price transparency, bigger discounts and better promotions. They also expect exceptional seamless omnichannel experiences that respond to their every whim with real-time personalized offerings.
Rather than seeing this as a hurdle, digitally curious distributors are seizing the opportunity to deliver tailored customer experiences, helping them build strong relationships with customers, while boosting revenue and earning loyalty as a brand.
But with their sights firmly on the customer, they’d do well to keep one eye on the competition, as manufacturers start selling directly to customers (D2C). Using the same data–driven intelligence tools, manufacturers are now creating their own relationships with end customers and building their own brand in the marketplace, leaving distributors out in the cold.
Nike recently left Amazon to “focus on elevating consumer experiences through more direct, personal relationships,” a Nike spokeswoman told CNBC. Their new D2C strategy could see them cutting their distribution partner list from 30,000 down to just 40.
And the trend in disintermediation looks set to continue as manufacturers set themselves up to capture a larger share of the overall value chain.
1. More Competition from Online Stores
Wholesale buyers today are just as demanding as end customers. They expect friction-free, personalized experiences and digitally enabled services (like customized reports, distributor inventory, etc.), for multiple users (sometimes as many as 10) across multiple channels.
Referrals and handoffs will have them clicking on a competitor’s link faster than you can say ‘please hold’.
According to a McKinsey survey, 57% of customers cited omnichannel convenience as one of the top three improvements distributors should provide. They want a complete e-commerce website with 24/7 customer service, order tracking, and real-time inventory management.
But while traditional distributors are scrambling to get into the digital arena, those already in that arena are creeping into theirs.
Amazon – who breathes customer experience – has recently entered the B2B space, bringing their top-shelf customer experience experts and big budgets with them.
And it’s working. After just four years, Amazon is now one of the biggest competitors in industrial distribution. Buyers are being lured by multiuser accounts, enhanced invoicing capabilities, and flexible payment options, and the company could be seeing $20 billion in sales in 2020.
Distributors will need to differentiate themselves by stocking products that would require too much investment (assets and people) for digital players to match, and by providing technical expertise and servicing.
Those in large segments that have high margins and low customer purchase power, that need limited technical know-how, and are easy to ship are in danger of being wiped off the supply change altogether.
2. Robots Are Taking Over the Factory Floor
Innovation is driving profound changes at every stage of the supply chain, but no more so than on the factory floor, where procedures along every step of the warehousing process are increasingly being managed by sensors and robotics.
According to the Tractica Warehousing and Logistics Robots report, worldwide sales of warehouse automation technology in 2016 were at $1.9 billion and are expected to reach a market value of $22.4 billion by 2022.
The main reasons for the trend are increasing labor and land costs, more frequent and complex orders, and customers demanding faster delivery. Automation can improve the accuracy of real-time inventory data, storage space capacity and warehouse efficiency. It can reduce energy costs, product damage, and injuries and claims. Basically, it can save money!
Amazon started using machines made by Kiva (the robotics company it bought in 2012 for $775 million) to automate the picking and packing processes at 13 of its large warehouses. Just two years later, they’ve cut operation costs by about 20% (roughly $22 million per fulfillment center) and could save an additional $800 million if they rolled it out to their remaining 110 centers. That’s some saving!
UPS’s new navigation system saved its drivers about 10 million gallons of fuel each year, saving up to $400 million in logistics costs.
According to Harvard Business Review, robotics and automation technologies have increased labor productivity by about 0.35% annually, which, they note, is on par with the impact felt by the introduction of the steam engine from 1850 to 1910.
But for manufacturers to really take advantage of these innovations, they’re going to need to invest in technology and skilled staff, and it’s unlikely smaller-revenue companies will be able to compete.
3. Smart Pricing Leads the Way in Distribution
The digital revolution will see companies of all sizes placing a focus on investing in core operations that unify processes and procedures, centralize data and capture incremental efficiencies.
Streamlining administrative and overhead functions, consolidating functions and adopting robotic automation of repetitive tasks will free up resources and improve effectiveness while cutting costs.
Meanwhile, they’ll be making a move away from traditional selling practices, and towards SaaS solutions, Industrial Internet of Things (IIoT) and cloud applications in order to unlock the power of big data analytics and artificial intelligence.
Distributors will be looking to price management, price optimization and CPQ solutions, like Pricefx: for accurate insights into prices and margins; to manage their pricing strategy, campaigns and discounts; to identify pricing opportunities; to define customer and product segments; to empower their sales teams to accurately respond to requests faster and win more deals; and to handle all manner of complex pricing tracking, rebate and crediting processes.
The shift will be from static to dynamic and value-based pricing. And the goal: optimizing prices while maximizing revenue.
They’ll be choosing cloud-based systems for their flexibility and scalability, as well as to reduce deployment and maintenance costs. They’ll also be benefiting from top-notch security and compliance that they’re unlikely to be able to implement themselves.
The world is going digital and industrial distribution has seen the light.
Smart companies throughout the supply chain are embracing digital transformation to automate procedures, streamline processes, reduce costs, improve operational efficiency, increase productivity, respond to customer demand, maximize margins and boost profits.